Products

Why you should Finance Equipment

Efficient use of cash flow is critical for all businesses. Assets, if purchased out right reduce cash flow in the year of purchase. The costs of borrowing may be reduced by tax deductions and paying with tomorrows dollars is cheaper than paying with todays. Remember, it is vital the equipment is used as security and that equity in property and other business assets are preserved.

Term of Loan

The term of the loan will vary depending on the nature of the equipment and the business of use. Terms of 3 to 5 year are the most common but are not the only options. You should avoid paying for an asset that has passed its useful life. Repayment schedules can be structured to suit the cash flow of each business.

Which Financier should you use?

This is assessed for each transaction. Whilst a bank or major finance company may be appropriate, there are second tier and specialist lenders that may suit your situation better. It is vital for businesses to diversify their source of funding and preserve the security of their property and other existing assets.

Types of Finance Available

Finance Lease
No deposit payable and a residual is mandatory at the end of contract. The customer indemnifies the financier for the residual value. The interest rate is fixed for the term of the loan and GST is applicable to rentals and residuals. Input tax credits are claimed on payments made during the period for each BAS. Businesses may claim rentals as a tax deduction to the extent the asset is used for business purposes. The financier owns the equipment, however the customer accounts for the asset on their balance sheet.

Asset Purchase (Formerly Hire Purchase)
Any amount up to the value of the asset may be financed. A deposit is optional as is a residual or balloon payment at end of the contract. The customer may claim interest and depreciation as tax deductions in proportion to the assets business use. A GST liability is incurred at the time of purchase. Businesses using accrual accounting may claim an up front input tax credit for all the GST with their next BAS.

Chattel Mortgage
The customer purchases the goods which are offered as security for the loan. Up to 100% of the value of the goods may be financed and both deposit and residual are optional. The customer may claim interest and depreciation as tax deductions in proportion to the assets business use. GST is claimed as an input tax credit as for any normal purchase.

Novated Lease
The employee leases the vehicle from the financier. The employee, employer and financier sign a novation agreement where the employer agrees to pay the rentals whilst the employee remains on staff. The employee has choice of vehicle, the employer avoids administrative costs managing the vehicle and does not incur a balance sheet liability. The employee is liable for the rentals should they leave their place of employment.A novated lease has Fringe Benefits Tax implications and you should seek independent taxation advice.

For Example
An employee leases a car with monthly repayments of $650. Under a novation agreement, the employer makes the $650 repayments on behalf of the employee. The employee sacrifices part of their salary to compensate the employer for the repayments and any fringe benefit tax liability. (FBT is usually a lower rate than the PAYG tax). Effectively the employee pays for their car with pre tax dollars.

Rental Finance
The financier owns the equipment and rents it to the client for a specified period. At the end of the rental contract the customer may extend the term, return the equipment to the financier, or make an offer to purchase. The equipment is ‘off balance sheet’ for the borrower. GST is applicable to all rentals and rentals may be claimed as a tax deduction. Rentals are ideal for equipment that rapidly becomes obsolete and requires updating. Rental Finance is sometimes referred to as an operating lease.

For Example
A business using digital printing equipment finds they need to regularly update their equipment to keep pace with technological advances. They want to avoid the costs of disposing of out dated equipment so they finance new equipment with a 3 year rental contract. At the end of the term the financier disposes of the old equipment and the client rents new modern equipment that keeps them up to date.

Lease In Escrow
A Lease in Escrow is a facility that funds progress payments basis until an asset is commissioned. On final commissioning the total cost of the asset is financed with a lease, asset purchase or chattel mortgage agreement.

For Example
A client requires a new crane for their factory. The supplier requires a 30% deposit, 2 progress payments of 30% and 10% balance on commissioning. The client does not have free cash flow to meet this payment schedule. Finance for the crane is approved. The financier pays the supplier according to an agreed schedule with interest only charged on funds drawn. When the crane is commissioned and the final payment made to the supplier, a 5 year asset purchase facility commences to pay off the crane.

Letters of Credit
Letters of Credit are used to pay for imported assets. The LC gives the exporter security of payment from a foreign client. The importer pays only when the specified goods are delivered at an agreed delivery point by an agreed date. Interest is only charged on funds drawn according to the agreed schedule. On final commissioning the total cost of the asset can be financed with a lease or asset purchase.

For Example
A client requires a new fruit grader from a Dutch supplier and finance is approved for the cost of the machine. An irrevocable LC is issued by the importers bank in favour of the exporter’s bank. When the grader is delivered to the shipping company and Bills of Lading issued, the exporter is paid 90% of the cost. The balance is paid on commissioning of the grader which is then financed by a 5 year Chattel Mortgage.

Business Loans
Businesses may require funding for many reasons from start up, growth phase through to maturity. There are many options depending on term required and repayment scheduled preferred. Each case must be assessed individually.

For Example
A client requires capital to expand their business and does not wish to use property assets as security. Their business is valued at $5 million. The financier takes a mortgage debenture charge over the company assets and advances the Business $2 million, interest only for 3 years.

Debtor Financing or Factoring
The borrower raises an invoice for goods/services supplied. The financier pays the borrower 80 – 85% of the invoice generally within 2 days. When the debtor pays the invoice, the financier pays the balance owed to the borrower less fees and charges. Interest is charged on the funds advanced. Used as an alternative to overdraft. Cash flow is the life blood of businesses and factoring turns your invoices into cash.

For Example
A client with a rapidly expanding business requires working capital. No property or business assets are available as security. A factoring facility is approved. The client issues invoices for $50,000 at month end and is paid $40,000 by the factor within 48 hours. The balance less fees and charges is paid over the next 45 days as payment for debtor invoices is received. Additional cash flow allows the client’s business to grow and negotiates discounts from suppliers.

Residential and commercial mortages
Funding can be arranged for existing properties, as well as land and construction. Commercial loans may be for up to 25 years with no ongoing fees. Full doc and low doc loans are available to approved clients.

What types of Assets can be financed?

As every business has different needs and requirements, the types of assets that can be financed are many and varied. The list below is not exhaustive but gives an overview of the different assets for which Asset Finance may be obtained.

• Computers
• Software
• Phone systems
• Office equipment
• Cars
• Vans
• Trucks
• Forklifts
• Printing Equipment
• Earthmoving Machinery
• Tractors
• Farm Implements
• Horticultural Equipment
• Greenhouses
• Wine tanks, wine barrels, vineyard equipment
• Optometry Equipment
• Medical Equipment
• Cool rooms

• Ovens
• Boilers
• Office Fit outs
• Pasta making equipment
• Bakery Equipment
• Curing Cabinets
• Lathes and Machining Centres
• Grinders
• Mills
• Guillotines
• Artwork
• Airplanes
• Photography Equipment
• Warehouse shelving & racking
• Scaffolding
• Laser Equipment
• Beautician and Hair removal equipment

Almost any asset a business uses to produce income can be financed. If you are unsure if an asset can be financed simply contact Lou for advice.